Sunday, September 24, 2006

ICRS-2B

International Cost Reporting Format Series-2B
Cost and Management Accounting for Owners.(Trading of goods and services.)
Owners of a business are those who have invested their capital into the business and who
are expecting Returns from the opportunity at a marginally higher rate at the least to stay
invested in the business.
Now the owners can be categorized as those who are loyal to the business (Family
Pattern) those who are loyal to yield (Share holders) and those who swap constantly their
capital with risks (short to very short term-Traders in ownership).
1.Let us first concern ourselves with Family business these type owners are creative
owners because they not only take risk of capital but also use their intellectual potential
to stay put in the business of doing business .This type of owners are interested more in
business sustenance and growth.Though they may try to infuse professional management
in the business they are close overseers and have the flexibility to keep a watch on the
management and in eventuality to decide on what the management has to do.
Such type of business are largely found in Proprietory concerns,partnerships,private
limited companies and even in a few business conglomerates,where demutualisation
between ownership and management is not to the optimum level.
Such owner managers do need data for decision making that gives optimum yield and
ensures growth and sustenance.Primarily Income expenditure statements do not reflect
the data thirsty owners of this category.This type of owners handle diversified business
activity.
A Cost and management accountant is expected to give necessary inputs to the owner
managers in real time and such information should be useful indecision making and guide
strategies to its logical end.
I would like to formatise some of the decision making situations and call for the Cost and
management accountants to certify these statements .
1.Owner manager as a trader:
The situation demands that the trader has a track on his :
a. Stock of physical goods.
b. Cash management.
c. Administrative costs.
D.Selling and distribution cost.
e. Procurement cost.
f. Carrying costs.
g. Unit cost of purchase and sale.
h. Cost per unit of each products upto the point of sale.
Cost of
carrying
the
productthat
is
recovery
depletion
over a
period.
Income
per unit
of the
products
available
and
traded.
Product
turnaround
details.(The
time it takes to
a product to exit
from shelf).
Qty of
product
available
for sale.
Unit
cost of
purchase
product
wise.
Administrative
cost Allocable
to these
product for a
period
irrespective of
sale.
Selling and
distribution
cost
allocable to
this
product for
a period
irrespective
of sale.
Certified that the products available for trade are not unnecessarily loaded with overheads
and losses arising out of non-moving depletion of other products and that the product will
sustain in the near term the profits of the business.The Income Mix from Various
Products traded is at the optimum.
Practicing Cost accountants.
Owner manager as a service provider:
This stakeholder needs to have a track of cost of service against recovery.Often recovery
is bound by external factors and are fixed per ubit of service rendered.Here the
stakeholder has to kennly keep track of where he spends the most.
1.Service self rendered-intellectual or vertically integrated(involving transfer pricing).
2.Service rendered as a middlemen.
3.Where price is influenced or where there is liberty to fix price.
a. Cost of providing service- split to point of rendering.
b.Recovery cost.
c.Differential pricing with and without value-addition .
,
Service-wise
Cost of
Procurement.
Recovery per
unit of service.
Price
differential
among the
customers
Transfer pricing
details
Cost of
Administration
selling and
distribution on
the service
provided.
Certified that the service available for trade are not unnecessarily loaded with
overheads and losses the sustainability of service in the near term is good.
Practicing Cost accountants.
Family run business are generally emotionally charged business and exit route is often
the final option and turnaround is always in the mind of such investor managers.So
sufficient and objective cost data is utmost vital for the sustenance of business.
Normally Traders incur expenditures to see through a point of sale transaction.There is no
value addition but expenses are incurred to earn value.Now basically A trader survives on
1.commission-2.dealers margin-3.hedging-and 4. volume of transaction with low to very
low margins. Cost incurred by a dealer normally includes Inventory Cost, transportation
cost, Interest cost, Administrative selling and distribution costs, Storage cost, Cost of
depletion due to long carry.As a cost accountant one has to basically identify cost and
arrange to collect and collate data for meaningful presentation.Trader often switches
trades and in the process may incur losses while switching which should be monitored.
The decision often a trader has to take is as follows:
1.Whether to Stock a product.
2.Price flexibility-To retain for a better bargain- vs- to move it out.
3.To assess the relative profitability of products traded in order to optimize.
4.To exploit on the competitive opportunities of similar product range.
Owner manager may be a producer,manufacturer or even primary service provider in
which case the earlier formats mentioned can be amended to include production details.
R.Veeraraghavan.AICWA.

Sunday, September 17, 2006

Draft for deliberation and approval:Part 1.Common Format For Cost Reporting-A step Forward towards ICRS

Draft for deliberation and approval:Part 1.
Common Format For Cost Reporting-A step Forward towards ICRS(International -Cost
Reporting Statements).
Genesis:
One of four pillers of the value economics is "Cost"(Use,Esteem,Exchange-Cost)Infact it
is the Bottomline of any economic activity. The concept of cost transcends from capitalist
concept of economics-Profit to socialist concept of Social –Value(Social cost –
benefit).Recently the term triple bottomline in accounting has emerged as an answer to
social-value(a communist concept).
Often Cost is discussed, debated and decided while an economic activity is thought of.The
very sustenance of an economic activity is dependent on the cost factor.With triple bottom
line being introduced the cost has grown more in importance for business sustenance.
World over the method of identifying,collecting,collating,and presenting data to the
management for decision making is called as" Cost and Management accounting".The
entire gamut of accounting for that matter evolves from "cost"and its presentation be it
project accounting,financial management,budgeting,valuation as a science and
art,financial accounting etc.
India is the front runner in implementing compliance audit and prescription based cost
accounting data collection as a precursor to planned development. Worldwide, cost data
collection and presentation was left to the management and hence the concept of
Management accounting came into picture .While Financial data addresses the needs of
the shareholders and external compliance in a liassez-faire economy,management
accounting helps to address the internal strength and sustainability.
Approach:
While there are various ways of presenting useful cost data to the management and
realtime analysis is the need of the management,Government had taken keen interest in
Cost data compilation specially in the manufacturing sector and identified 47 industries
where it has framed Cost accounting record rules. However exemption is given to SSI
units and also to industries and units that has adopted other than company form of
business. This has resulted in selective compilation which does not give a true picture of
resource consumption in the economy. While the government has its own wisdom in Cost
accounting-Management accounting should be a part of business in which ever form and
magnitude it is undertaken.This only helps the management to envision growth and
sustenance of ventures.
The need to cover all business with a common reporting format for presenting cost data
has always been there, though dynamics of Cost and management accounting impresses
one to be formatless and make it an art of presentation.
1.The business situations that can encompass this global village are:
a.Proprietory
b.Partnership
c.Company(closely held and public liability)
d.Cooperative
e.Societies
f.Charity(religious and educational)
g.Government(Local,federal,Central)
2.The activities encompass:
a.Primary produce(Agro-based-commercial and subsistence farming and related
processing).
b.Secondary produce(manufacturing and mining).
c.Services sector.
d.Social economics and public funding.
e.Finance sector-banking,insurance,capital and commodity markets.
f.Information technology.
g.Taxation.
Incase of the forms of business the compliance norms vary and hence a comprehensive
format should adhere to the basic needs of the society.While the objective a Cost and
Management accounting is two pronged
1. Ensuring optimal consumption of resources at the least cost and
2. Enabling value engineering mechanism to trigger efficiency through continuous
availability of data.
It also helps management to switch and vary decisions in real time.
While analysis of cost data can take any forms the format now being intended to design is
for the
purpose of accomodating all the requirements at one place.
Factors(not an exhaustive list) to be considered in formulating a standard Cost
information chart:
1.Resource consumption and related Cost.
2.Reasonability of Price based on cost.
3.Process efficiency-Revelation of Scope for improvement.
4.Cost Related Quality Issues.
5.Benefit of product mix for business sustenance.
6.Make or buy decisions.
7.Cost-benefit revelations.
There are two approaches the bottom-up approach where we start from the cost
identification stage and go up to management reporting and the second one where
we schedule our cost on the basis of business requirements.
We will address the problem from both the angle first from Bottom-up approach:
1.Identification of Cost of an unit of product/service. This is based on probing which
are cost directly and indirectly involved in making the product and which are
purely financial or policy costs.
For instance let us take the example of manufacturing a TV remote(electronic kit)it
could be a pure assembly plant or part components producing plant.If u visualize
the product u will find that this product has various materials being used ranging
from rubber and plastics to silica and these may be either bought for assembly or
produced with raw-materials and intermediates .Each component undergoes certain
process before it is ready for assemblage. Each component may have to be treated
as a product in itself and has its life-cycle{(Innovation and use value(expiry date)
may put it out-of use)}.Moreover some components has its own shelf life. They may
also be impacted by carrying cost as inventory at various process stage depending
on the fluctuation in demand.
Likewise in case of service industry one should identify the cost related to service
rendered.For instance take the example of a Bank which renders only a savings
bank facility.This facility involves payment of interest on the monthly minimum
balance.The cost involved in the service may range from administrative cost,cost of
attracting funds from depositors,cost of placement of funds,cost of idling funds in
anticipation of withdrawals by depositors,etc.
2.Identification of cost centers: This is the next step which identifies the place where
the cost is incurred.
3.Identification of activity centers where cost centers can be related and the cost
incurred can be absorbed.ABC concentrates primarily on overhead allocation and
its premise-cost object consume activities,activities consumes resources,and
consumption of resources inturn drives cost.Understanding this relation makes one
better manage overhead allocation.
Presenting reports to stake holders:
There are various groups to be addressed and the format will be cumbersome
addressing their needs.So output oriented formats addressing specific needs of the
stakeholders is framed in the various annexures.The idea is not to unravel Costing
mechanism as such but build an output structure from the baseline data collection
and interpretation according to user requirements.
Let us begin with Customers or end users.
What do they expect from a product or a service?definitely not profitability of the
concern,not its book value of shares, but can I get the product yet cheaper!yet
durable!is the company more dependable for after sales backup these are some of
the questions in the minds of rational buyer.Do financial statements give adequate
data to the customer or even does it address the customers needs?
Now there is a thin line of barrier between what the customer wants(information)
and what the business can part(since business contends secrecy issues).How do we as
a Cost and management accountant move further!Well here is how I present the
output for customers of a product or a service.While the core information still can
be retained by the management customers can be given a compliance certificate
from a Practising cost accountant who has audited the Cost accounts and the
internal control systems.
Format for certifying the price of the product on the basis of Cost Audit
1.Industry
price range.
2.Product
variability
3.Qualityendurance(
feed
back)
4.Cost Break up
(Direct-
Indirect)Summary.
5.Differential
pricing
parameters
and impact
on customers
as a whole.
Certified as to the authenticity of cost data compiled internally and duly audited by
the undersigned. Certified also that there is no deficiency at the efficiency
parameters fixed internally and consequently no unfair loading in the price has
taken place.
Practising cost accountant.
While column 1,2 & 3 will concentrate on industry figures,Column 4 & 5 will talk of
cost data in summarized form(Direct cost in absolute figures per unit and indirect
cost in absolute figures per unit,finance and other miscellaneous cost not allocated
as indirect cost but loaded in the product price should be specified in absolute
figures. Differential and preferential price adopted by the company and its impact
on customers by category should be specified including transfer pricing details and
its benefit or loss to the business and its impact on the product..
The above format is generally applicable to manufacturing Product,Primary
produce,service in the form tangible and intangible(telecom,electricity) except
intellectual service.The format for the same is below:Banking service,insurance
service, intellectual service.
1.Relative
charges for
service in the
industry.
2.Service
variability
3.Quality and
reliability
assessment.
4.Cost involved in
rendering the
service(direct and
indirect)Summary.
5.Differential
Pricing of
services and
its impact.
Certified as to the authenticity of cost data compiled internally and duly audited by
the undersigned.Certified also that there is no deficiency at the efficiency
parameters fixed internally and consequently no unfair loading in the price has
taken place.
Practising cost accountant.
Do the customer require anything more than this !To build customers confidence this
should be introduced to all business including commercial exploitation of agricultural
produce.
Next comes Tax authorities who are interested in collecting revenue for the
Governement:
1.Direct Taxes-Principle is to determine income by making certain allowances and
disallowances (in income and expenditure)and also applying certain incentives and
disincentives(for growth and sustenance of business a policy decision).
P&L a/c thus is not sacrosanct for the Income tax authority.While business will
require to go by their financial statement Tax authorities will try to optimize
revenue.Cost data comes handy for the administrators to assess the spending
pattern and also the transfer price and its impact on profit as well as captive
consumption parameters.
While already the tax authority insist on cost auditors report wherever applicable a
separate format for them will enable proper application of wisdom.
Below is an indicative format:
1.Product/service wise Cost format:
Cost per unit of each
product
/service(direct/indirect/other
cost attribution)summary
2.Expenses
not
attributed
to the
product
or service
but spent
and
accounted
in P&L
a/c
3.Capital
expenditure
Collated to
capacity
addition/to
sustain
existing
capacity
related to
the
product.
4.Social and
environmental
cost
accountable to
business
sustenance
not directly
impacting
production.
5.Revenue
on
account of
product
/service
sale and
those not
related to
product or
service
separately
accounted.
Certified that the expenses are largely due to the activity undertaken by the business
which results in product/produce/service.Examined the cost records thouroughly and
have reason to believe in the above contention.
Practicing Cost Accountant.
For Indirect taxation specially excise and customs already formats are designed so
we need not discuss it further.Also the CARR sufficiently addresses the
manufacturing activity and requirement of government of India.VAT has
recognized a specific format of data collection and certification which need not be
probed further except if the department needs improvement and it is its
prerogative.
Government of India at the macro level should compile data on the following format
Industry wise annually:
1.Name and
Quantity of
raw materials
consumed
2.Wastages and
pilferage
details(normal
and abnormal)
3.Recycling
details
4.Resource
available
internally and
import
component
5.Scrap
generated and
disposal
mechanism
Cost of the raw materials along with year wise trend,Enviromental impact.
Industry associations should submit this data duly certified by the practicing cost
accountant.End of Part 1.
Part 2 will discuss business mans requirement of cost accountants certification.
*********************************************

Income Accounting-Inseparable to Cost accounting.A paradigm study.-File 2AICRS.
Draft.
Cost Accounting is Related to Study of Cost parameters to arrive at optimisation of
revenue .There is dimension to the efficiency .
Income accounting is related to study of external factors that will fetch maximum
revenues out of available opportunities.There is dimension again to earnings
efficacy.
Income Accounting is a process of analysing and arriving at a choice
of Maximising revenues from Opportunities.
While Cost Accounting Addresses Cost Minimisation
issues.Management accounting Reposes Faith on effective reporting of management
concerns on Opportunities and impact of management decisions.Financial
management concerns with Risk-Return to optimise revenue.Financial Accounting
Concerns matching of Revenues with Expenses.Income accounting is a system of
Assessing "What if" and "Why Not" of opportunities of earnings.
Revenue Realisation is Impacted by market sentiments.
Differential pricing due to segmentation.
Opportunities of Globalisation.
Overall strength of the market that is addressed-Recovery aspect.
Market sentiments-Maxim "Right product,Right Time,Right Place"-Cost triggered
Product mix issues.
Segmentation of market-Production related Sales decision as well as market
expansion aim.
Emerging Global opportunities-Revenue of currency differentials.
Strength of revenue realisation in the market.
Did Cost Accounting Miss it?
Yes-Its focus had all along been Cost engineering in the process it neglected Income
analysis.
Profit centre identification and segmentation of revenue to match with cost
collection is one aspect and talking of Maximising through income-mix is another.
No-Cost accounting consisting of methods of accounting and its technique are
sufficient to be extended to income-concept analysis.
Current Practices:
Off Balance-sheet approach:A decision to earn is often left to top management(The
Board).Financial analysis comprising of IRR/NPV for capital investment
decision."Stabilised revenue" or "mean recovery" approach on the premise of
Perfect competition-Seller sets the price and thus impacts Income ,approach is
adopted.
Revenues do not reflect volatility of earning and opportunity availed to earn them.It
is just a mere consolidation of receipts from area-wise/customer-wise/productwise/
Preference to sell –wise.
Do Income need break-down analysis and reflection in Integrated Cost-management
system.Answer is yes!
Recognise Revenues as improvables.
Match revenues with cost.
Create Profit centres.
Use activity Based Cost-revenue matching.
Study Revenues from maximising perspective in coordination with sales department.
Revenues –Matrix.
Matching revenue with Cost-Cost accounting is identification classification and
allocation of cost to product and processes as to arrive at true picture of Profit when
matched with activity.The process is not complete without identification of cost
centres,Profit centres and Activity centres where inflow and out flow can be
matched.
While Cost is broken-down to product and processes .Income should also be broken
down into Opportunities and activity centres that are linked to profit centres should
now be linked to new concept of Opportunity(for maximisation of revenue)centres
cost should be prorated to find and concentrate on the best available opportunity –
Eliminating bottlenecks to opportunity of earning higher revenues.
Matching of Opportunity centre with Cost.
An Opportunity centre is one from where the revenue is actually
realised.
It could be with reference to a product a single product/similar
product/Market/Customer/Place.
A single product is an Opportunity when it fetches revenues
differently when focussed.
A similar product is one when it earns incremental revenue to the one
normally produced.
A market in relation to product is one that generates incremental
revenue when focussed.
A customer or group similarly enjoys incremental revenue status.
So is a place in relation to Product and resultant revenue
Constraints to Opportunity
Time of delivery and advantage to competitors.
Barriers of space-Political/inaccessible.
Perishable product itself.
Taxation.
Cost of transportation and logistics.
Cost of customer and market retention.
Threat of loosing next best and stable opportunities.
Loss of buffer in the long run(MRP and its related benefits).
Methods of Income accounting
Like methods of Costing-Job costing/process costing/contractcosting/
lifecycle costing methods of Income depiction involves "single product
many opportunities analysis"’Similar product best opportunity analysis"’Differential
pricing for markets and customer analysis".The accountal of these will be segmented
with cost spread on the basis of actual sales realisation in case of each opportunities
instead of "mean spread"earlier adopted and "activity spread method" currently
used.
Techniques of Income accounting
The techniques of costing like marginal costing/Budgeting/Standard
costing can be employed for revenue generation as well where standards of revenue
can be fixed for a product based on expectation of yield and related cost incurred and
realisation can be compared to ascertain whether the product continuance is justified.
Similarly Marginal revenue is the minimum required for sustenance
of the product or that revenue required to continue with the opportunity in
segmented condition
Conclusion
Income Accounting enables realistic assessment of Product
sustainability.
It dispels the Notion that revenues are of a fixed pattern and probes
into a possible improvement in maximising revenues.
It accepts the fact that revenues follow a complex structure as cost do.
It tries to classify revenues into opportunities and matches with related
cost.
It is global in application for product and services where competition
is matured
Management Reporting Format for accounting Income optimization:
1.Income-
Product
or
Service
wise.
2.In terms
of
absolute
figures
and unit
income
3.Increments in
revenue due to
differential and
pricing.Product
wise-Units
correlated
figures.
3.Depletion
in
revenue
due to
Transfer
Pricing
its impact
on
Income.
4.Other Income(noncore
activity and
investment)analysis.
Comparative Cost-
Benefit in terms of
yield.
5.Opportunity
sensitivity
due to
Income
mix.
Related
gains or
losses.
Income-
Cost
matching
based on
equated
cost
method
and
mapping.
Certified that income earned during the year is by way optimum product mix and
the yield from the mix-including non-core deployment do not suggest any weak
decision in sales or investment deployment.
Practicing cost accountant.

Author:R.Veeraraghavan.AICWAI.

Thursday, June 15, 2006

Inclusive accounting already in practice

The provision in the "companies audit order "MAOCARO" ,for instance in case of RIL the statutory financial auditor certifies that Cost accounts records are inspected and found to be duly made and maintained.This should prove how the government views the job of an accountant as inclusive though partially in favour of ICAI.The provision was intended to monitor compliance of maintenance of books when the companies where supposed and audit was not ordered.But i do not find the intention in the order to enable a statutory financial auditor to comment upon the books of the company when statutory cost audit is ordered and cost auditor is appointed.
If the GOI intention can be replicated in action then the companies act should be suitably amended to accomodate professional of ICWAI to conduct Statutory financial audit.

Saturday, June 10, 2006

What is Inclusive Accounting.

Accounting has diversified its status conceptually and practically over the Last century.It all started with bookkeeping-Drawing profits periodically-Maintaining Cost records-Preparing management reports and financial statements-Designing and fixing internal controls to check data/document/process flow-To complying to Tax authorities-Complying to global standards of accounting-To designing and tracking system flow-To enabling audit of all these above and finally at a stage to converge.
Inclusive accounting is an information mechanism that is enabled by advent of computers and business globalisation,Whereby the data required for processing management reports and compliance reports are converged and processed into a well developed scheme to give value added information to the end user on demand.
Integration of required data for generating various reports is one of the prime requirement of Inclusive accounting.
An inclusive accountant is supposed to deliver what is required by the user at the right time and place.